Balkrishna Industries (BALIND) CMP: | 1,450 Target: | 1,700 (17%) Target Period: 12 months BUY November 8, 2020 Robust performance, firm growth prospects lie ahead Balkrishna Industries (BIL) reported stellar Q2FY21 results. Standalone revenue was at | 1,579 crore (up 47% YoY), amid ~36% rise in volumes to 61,224 MT. Margins rose 903 bps YoY to a near five-year high of 34% amid Particulars 494 bps gross margin expansion and savings in employee costs and other P articular ₹ crore expenses. Consequent PAT came in at | 340 crore (up 16.7% YoY). BIL Market Capitalization 28,031 Update declared second interim dividend of | 4/share (record date: November 14). Total Debt (FY20) 861.2 Healthy demand, market share gains keep outlook constructive C ash & Inv (F Y 20) 1,108.6 E V (₹ C rore) 27,783.6 Result BIL is the market leader in the niche export-oriented off-highway tyre (OHT) 52 week H/L (₹) 1515 / 678 segment. As of H1FY21, agri, OTR demand formed 64%, 33%, respectively, E quity capital (₹ crore) 38.7 Face value (₹) 2.0 of end user applications, while in term of geographies Europe (51%), India (23%), North America (14%) constituted its major markets. Replacement demand formed 71% of overall pie. Demand prospects for its products Price Chart remain healthy, particularly on the Europe agri side, where it has gained 1500 14,000 market share in aftermarket amid overall positivity for the industry. The 12,000 company continues to introduce new SKUs (average of ~100 every year) 1000 10,000 8,000 and engage in brand building (via ad spends) in order to gain incremental 6,000 500 4,000 market share. Successful backward integration (own carbon black plant of 2,000 1.4 lakh MT per annum capacity) is expected to mitigate some of the 0 0 upcoming pressure in input costs and thereby protect margins, keeping it Nov-17 Nov-18 Nov-19 Nov-20 around the guided 28-30% band. We build 6.7% volume CAGR in FY20-23E May-18 May-19 May-20 and estimate margins staying around the ~32% mark by that time. BIL (LHS) Nifty (RHS) Q2FY21 earnings conference call – key takeaways Price Chart BIL said (1) agri demand remains strong across geographies with OTR Revenues rise 47% YoY in Q2FY21 demand stable; BIL expected to post marginal YoY volume growth in FY21E tracking 36% volume increase, amid resurgence of Covid in Europe, (2) achievable capacity has been with EBITDA margins at 34% reduced to 2.8 lakh MT per annum (down ~6-7%) amid some technological redundancies and product mix changes but this is not seen impacting FY22E Demand visibility stays healthy & FY23E growth prospects. BIL is evaluating brownfield additions, (3) 28- especially on agri side. Backward Research Equity Retail 30% remains sustainable long term margin range, with ASPs over next few integration to help BIL continue to – quarters seen at ~| 245-252/kg, (4) BIL has gained some market share in post strong margin in ~30% range Europe aftermarket and in India (now at 5-6%) and has leadership position With B/S strength and healthy in Australia agri sector, (5) ad spends are seen remaining at | 100 crore per growth prospects we retain our annum level, (6) third party sales of carbon black amount to ~20% of BUY rating on the stock with capacity, ~2% of sales revenues and (7) capex guidance for FY21E, FY22E revised target price of | 1,700 is at ~| 700 crore, ~| 200 crore, respectively (ex-possible brownfield). Research Analyst ICICI Securities Securities ICICI Valuation & Outlook Shashank Kanodia, CFA [email protected] For BIL, sales, PAT are seen growing at 11%, 12% CAGR, respectively, in FY20-23E. BIL continues to broadly deliver on stated growth and margin Jaimin Desai guidance. BIL’s net debt free B/S, double-digit return ratios and strong cash [email protected] generation provides us margin of safety. As a result, we continue to hold a positive view on the stock and retain our BUY rating with a revised target price of | 1,700; valuing it at 25x FY23E EPS of | 68. Key Financial Summary Key Financials FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E) Net Sales 5 ,244.5 4 ,782.5 5 ,238.4 6 ,016.8 6 ,537.2 11.0% EBITDA 1 ,311.1 1 ,249.3 1 ,572.6 1 ,865.7 2 ,088.6 18.7% EBITDA Margins (%) 2 5.0 2 6.1 3 0.0 3 1.0 3 2.0 Net Profit 7 82.0 9 45.0 9 29.7 1 ,133.5 1 ,315.5 11.7% EPS (₹) 4 0.5 4 8.9 4 8.1 5 8.6 6 8.0 P/E 3 5.8 2 9.7 3 0.2 2 4.7 2 1.3 RoNW (%) 1 6.7 1 8.8 1 6.7 1 8.2 1 8.8 RoCE (%) 1 6.7 1 4.4 1 7.6 1 9.7 2 0.4 Source: Company, ICICI Direct Research Result Update | Balkrishna Industries ICICI Direct Research Exhibit 1: Variance Analysis Q2FY21 Q2FY20 YoY (%) Q1FY21 QoQ (%) Comments Quarterly topline came in highest ever tracking robust tyre sales Total Operating Income 1,578.8 1,071.2 47.4 928.7 70.0 volume for the quarter. Revenues in Q2FY21 up 47.4% YoY RM to sales came in substantially lower with gross margin Raw Material Expenses 611.5 467.8 30.7 366.5 66.8 expanding to ~61%. Management said these gross margins will compress to ~58%, which looks more sustainable Employee Expenses 84.4 70.1 20.5 70.1 20.4 Other expenses were controlled tracking operating leverage Other expenses 346.2 265.8 30.2 261.5 32.4 benefits as well as cost savings initiatives at BKT. Other expenses as percentage of sales came in at ~22% of sales EBITDA 536.7 267.5 100.7 230.6 132.8 EBITDA Margin (%) 34.0 25.0 903 bps 24.8 917 bps EBITDA margins came in at nearly a five year high of 34% Other Income 18.4 80.7 -77.2 33.3 -44.8 Other income lower due to forex loss (realised & unrealised) Depreciation 101.2 90.8 11.5 99.6 1.6 Interest 3.4 1.7 94.8 2.4 40.1 Tax 111.0 -35.3 -414.4 40.1 177.2 Tax rate for quarter at 24.6% of PBT PAT 339.5 291.0 16.7 121.8 178.7 PAT came in at ~| 340 crore, up 16.7% YoY. PAT growth lags the EPS 17.6 15.1 16.7 6.3 178.7 topline and EBITDA growth due to lower other income and negative tax incidence in the base quarter Key Metrics Volume (MT) 61,224 45,169 35.5 38,096 60.7 Sales volume for quarter came in robust at ~61,000 tonne Source: Company, ICICI Direct Research Exhibit 2: Change in estimates FY21E FY22E FY23E (| Crore) Old New % Change Old New % Change Introduced Comments Robust Q2FY21 leads us to upgrade sales volume as well as revenue estimates for FY21-22E. Introduce FY23E Revenue 4,900 5,238 6.9 5,659 6,017 6.3 6,537 estimates. We expect topline to grow at CAGR of 11% in FY20-23E EBITDA 1,427 1,573 10.2 1,695 1,866 10.1 2,089 Upgrade our margin estimates tracking robust performance EBITDA Margin (%) 29.1 30.0 89 bps 30.0 31.0 106 bps 32.0 in Q2FY21. Introduce FY23E margin estimates at 32% PAT 866 930 7.4 1,111 1,133 2.1 1,315 Upgrade in sales and margin estimates leads to marginal upgrade in earning estimates for FY21-22E, which are likely EPS (|) 44.8 48.1 7.4 57.5 58.6 2.1 68.0 to get impacted by lower other income due to stable forex movement vs. depreciating rupee in the past. On PAT front, we expect earnings to grow at CAGR of 11.7% in FY20-23E Source: ICICI Direct Research Exhibit 3: Assumptions Comments FY18 FY19 FY20 FY21E FY22E FY23E Management opined that certain capacities are redundant now with introduction of new SKU's as well as technologies. Capacity (MT) 300,000 300,000 300,000 280,000 280,000 280,000 Effective available capacity now stands at ~2.8 lakh tonne vs ~ 3 lakh tonne in the past With guidance of marginal positive growth in volumes for FY21E, we expect volumes to grow 10% thereafter in FY22E and Sales volume (MT) 199,213 211,261 201,760 206,973 227,612 245,821 8% the following year i.e. FY23E. On CAGR basis, we expect tyre sales volume to grow at a CAGR of 6.7% over FY20-23E Volume growth (%, YoY) 6% -4% 3% 10% 8% Source: ICICI Direct Research ICICI Securities | Retail Research 2 Result Update | Balkrishna Industries ICICI Direct Research Financial story in charts Exhibit 4: Topline trend 7000 6000 We expect sales to grow at a CAGR of 11% over FY20-23E 5000 4000 3000 (₹ crore) 2000 1000 5,245 4,782 5,238 6,017 6,537 0 FY19 FY20 FY21E FY22E FY23E Net Sales Source: Company, ICICI Direct Research Exhibit 5: Capacity and volume trend 350000 300000 We expect tonnage volumes to grow at 6.7% CAGR 250000 over FY20-23E to 2.45 lakh MT 200000 (MT) 150000 100000 50000 3,00,000 2,01,760 2,06,973 2,80,000 2,45,821 3,00,000 2,11,261 2,80,000 2,80,000 2,27,612 0 FY19 FY20 FY21E FY22E FY23E Capacity (MT) Source: Company, ICICI Direct Research Exhibit 6: Trend in EBITDA margins 65 32.0 34 31.0 30.0 60 31 26.1 28 55 25.0 Margins seen improving to 32% by FY23E amid 25 backward integration benefits and better operating (%) 50 (%) leverage 22 45 47.0 19 44.5 40 16 39.9 40.3 40.1 35 13 FY19 FY20 FY21E FY22E FY23E RM/Sales ratio EBITDA margin (RHS) Source: Company, ICICI Direct Research ICICI Securities | Retail Research 3 Result Update | Balkrishna Industries ICICI Direct Research Exhibit 7: Trend in profitability 1400 1,315 1,133 1200 945 930 1000 782 PAT seen growing at 11.7% CAGR in FY20-23E to 800 | 1,315 crore) 600 507 ₹ 469 ( 419 333 368 400 200 0 FY19 FY20 FY21E FY22E FY23E PAT Depreciation Source: Company, ICICI Direct Research Exhibit 8: Valuation Summary Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (₹ cr) (%) (₹) (%) (x) (x) (%) (%) FY18 4,464 17.8 38.2 3.4 37.9 25.4 18.1 15.7 FY19 5,245 17.5 40.5 5.8 35.8 21.4 16.7 16.7 FY20 4,782 -8.8 48.9 20.8 29.7 22.8 18.8 14.4 FY21E 5,238 9.5 48.1 (1.6) 30.2 18.0 16.7 17.6 FY22E 6,017 14.9 58.6 21.9 24.7 14.9 18.2 19.7 FY23E 6,537 8.6 68.0 16.1 21.3 12.9 18.8 20.4 Source: Bloomberg, ICICI Direct Research Exhibit 9: Shareholding pattern (in %) S ep-19 Dec-19 Mar-20 Jun-20 S ep-20 P romoter 58.3